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Oil-Rich Deep Waters Off Brazil Still Beckon

State-controlled Petr?leo Brasileiro (PBR) is by far the world's biggest oil producer in waters deeper than 1,000 feet. In 2009, Petrobras, which is based in Rio de Janeiro, pumped 20 percent of all oil from deep waters, according to data compiled by PFC Energy, a petroleum industry consultant. Petrobras' closest deepwater rival is ExxonMobil (XOM), with 13 percent of production.

This deepwater dominance leaves Petrobras more exposed than any oil company on the planet to the risk of an accident similar to the Deepwater Horizon spill in the Gulf of Mexico, the largest in U.S. history. Undeterred, the company is sticking with its aggressive schedule of deepwater drilling; in June alone, Petrobras found a pool of oil estimated to hold 380 million barrels almost three miles below the ocean floor in Brazil's Campos Basin.

Hugo Repsold, an exploration and production manager at Petrobras, says the U.S. moratorium imposed after the Deepwater Horizon spill will not stunt Petrobras' development of offshore fields including Tupi in the South Atlantic deep waters off Brazil, the largest discovery in the Americas since Mexico's Cantarell find in 1976. Petrobras is accelerating investments to more than double oil production by 2020 and thus boost economic growth and employment in Latin America's largest economy. "We are using the best practices, the best technology, the best equipment, and we are confident we can keep drilling all these wells, performing with the necessary safety and environmental care," Repsold says. "The [Brazilian] public, they support these efforts."

Petrobras may even try to hire badly needed drilling rigs at a discount now that the U.S. has curbed deepwater drilling in the Gulf, according to Rebecca Rosen of PFC. "It is very likely that rig contractors will at least try to move rigs out of the Gulf of Mexico," Rosen says. "An overflow of rigs in Brazil would certainly favor Petrobras in its ability to reduce rates." Rosen figures 40 percent of the rigs in the Gulf are able to operate in Brazil. Petrobras declined to comment on plans to hire rigs leaving the Gulf.

Industry analysts and Petrobras' suppliers say the company maintains quality and safety standards that meet and often exceed those of its peers, including BP, which operated the oil well whose rupture continues to contaminate the Gulf coast. The U.S. will split up the federal regulator, the Minerals Management Service, following accusations it was too lenient in letting the oil industry monitor offshore drilling itself. In contrast, Brazil's Ag?ncia Nacional do Petr?leo, or ANP, has long kept a much closer eye on operators, says Cleveland M. Jones, a professor of geology at the Universidade do Estado do Rio de Janeiro. "Almost every step of the exploration process up to production is monitored, and reports are sent out regularly about procedures that are undertaken, so there is less self-monitoring here than in the Gulf of Mexico," says Jones, who has done extensive research on Brazil's deepwater oil basins.

Still, Brazil can't escape the risks of drilling wells miles below the ocean floor that penetrate reservoirs where temperatures reach 390F (198C). "[Petrobras] is talking about a large expansion that will substantially increase the possibility, just by probabilities, that accidents could happen," says Christopher Palmer, who oversees $5 billion in emerging market stocks, for Gartmore Investment Management in London.

Petrobras, which started drilling offshore in 1968, has suffered accidents, too. The deadliest was in 1984, when 36 workers died evacuating a burning platform. Eleven workers died in 2001 when a platform exploded and sank into the Atlantic off Rio. Still, Petrobras has little choice but to stay the course: Ninety percent of its proven reserves lie in the deep waters off Brazil.

The bottom line: The BP catastrophe has prompted a drilling moratorium in the Gulf. Undeterred, Petrobras is aggressively drilling in even deeper water.